Winning vital breathing space from lenders sent shares up 35%, but should investors stay on board?
The high-risk strategy of investors betting on Debenhams (LSE:DEB) to survive its current crisis was rewarded today when the department store chain revealed a funding lifeline.
Its additional £40 million credit facility for the next 12 months ensures that the chain will be able to meet quarterly rent payments due next month, as well as progress talks with lenders about a broader refinancing and recapitalisation of the ailing business.
It's a small but significant step, particularly as it highlights that Debenhams' banks and bondholders remain supportive while the more substantive talks concerning the company's £520 million debt facilities take place.
The update was enough to trigger a relief rally of 35% for the battered Debenhams share price, although that's small consolation for investors who have stayed loyal only to see the retailer lose 90% of its value in the space of a year. Its market value has plunged below £40 million.
For more recent investors, the challenge will be to judge whether it's worth staying on board to ride out the inevitable volatility of the coming months, or if today's sharp share price rise represents an appropriate exit point.
Source: TradingView (*) Past performance is not a guide to future performance
Laid low by having too many stores on long leases, the company is likely to need landlords to support a potential Company Voluntary Arrangement so it can reduce the significant rent burden. However, any agreement is certain to be accompanied by more shareholder pain, possibly through a rights issue or debt-for-equity swap. All this will have to be achieved against the background of Brexit-driven retail uncertainty and intense retail competition.
In striking today's interim deal, Debenhams continues to keep major shareholder and Sports Direct International owner Mike Ashley at arm's length. His offer in December to provide a £40 million loan was snubbed by the business, although the tycoon subsequently succeeded in voting chief executive Sergio Bucher off the board.
Bucher described today's announcement as the "first step in our refinancing process". He added: "The support of our lenders for our turnaround plan is important to underpin a comprehensive solution."
In a further boost, Bucher unveiled a new strategic sourcing partnership with leading supply chain solutions partner Li & Fung.
This will cover a material part of Debenhams' own-brand sourcing and should deliver benefits through improved product quality and lead-times, as well as higher achieved margins and better working capital efficiency. Initial orders under the agreement are due to commence soon.
Many of the retailer's woes stem from its controversial period in private equity ownership, which left it with stores on long, onerous leases. It is now cutting costs and capital expenditure, having reported a 27% slide in underlying earnings to £157.3 million for the year to September 1. Exceptional items meant it reported a bottom-line loss of £491.5 million.
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